Kiplinger: New Reverse Mortgage Changes Could Cost Borrowers More

The overhaul of the reverse mortgage program continues as the Department of Housing and Urban Development recently proposed more changes aimed at making the Home Equity Conversion Mortgage (HECM) program stronger than ever. But these changes have the potential to cost new borrowers a lot more money, says a recent Kiplinger article.

The goal of these specific rules is to help reduce the default rate on the loans, which is currently at about 10%. Last year, the rule was made that borrowers must prove that they are able to afford their property taxes and insurance for the entire duration of the loan, the article explains.

But now, HUD has proposed an addition to the list of property charges: utilities. This would mean that if a homeowner with a reverse mortgage wasn’t able to keep up on their utility bills then the loan would go into default.

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“HUD doesn’t want more folks kicked out of their homes,” the article writes. “Adding utilities to the covered property charges means the financial ability to cover that cost much be considered in the financial assessment that borrowers must pass.”

Failing this financial assessment wouldn’t automatically disqualify a potential borrower, but it may mean that the lender is required to carve out a “set aside” from the loan proceeds.

The other proposed change made by HUD that has the potential of costing borrowers more money is the cap on adjustable-rate loans. If the proposed rule is passed, there would be a 1% point annual cap and a 5% point lifetime cap on interest-rate changes for an adjustable loan.

This would mean that there’s a potential that the lowered caps may cause lenders to charge higher initial rates, Peter Bell, president of the National Reverse Mortgage Lenders Association, says in the article.

Many borrowers could be affected by this rule because currently, adjustable-rate loans are currently the most popular choice among borrowers.

Read the full Kiplinger article.

Written by Alana Stramowski

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  • How would the addition of “utility” items to property charges differ from the current $.14/s.f. charge included in Financial Assessment?

    • REVGUYJIM,

      It could be very significant if added to the definition of Property Charges at Section 5.3 of the HECM Financial Assessment and Property Charge Guide (“the Guide”). Including any utilities to the definition at Section 5.3 under the heading, “FORMULA FOR CALCULATING PROJECTED LIFE EXPECTANCY PROPERTY CHARGE COST,” (i.e., Fully Funded LESAs) when applicable would increase the Fully Funded LESA computation which would have a real financial and economic impact on the Net Principal Limit available to borrowers. (Partially funded LESAs already reflect an adjustment for utilities in the Monthly Residual Income Shortfall computation and, otherwise, have no component for Property Charges as the computation for fully funded LESAs do.) You will find the Guide at:

      http://portal.hud.gov/hudportal/documents/huddoc?id=14-22ml-atch2.pdf.

      If the addition of utilities impacts all definitions of Property Charges at Sections 2.26 and 2.28, tests related to Property Charges outside of Section 5.3 would come into play. See the following Sections of the Guide: 2.27, 3.76, 3.95, 3.98, 4.2, and 5.5. All see the following pages of the Guide: Pages 79 and 80 (Extenuating Circumstances), and Page 81 (availability of partially funded LESAs).

      Without some research and understanding of the practical uses of definitions, it is hard to see how including utilities as part of property charges might change things at all. That is but another reason for understanding what definitions actually mean within a specific context.

      • The idea of residual income seems to have come from the VA underwriting guides. VA does not require adding utilities to the analysis, nor should we.
        The .14 factor is to account for maintenance, not utilities.

      • That was my initial thought as well, but it’s incorrect. From page 67 of the FA guide (3.94 Maintenance and Utility Charges) – “Mortgagees may rely on the formula established by Department of Veterans Affairs (VA) for estimated maintenance and utilities in all states. Mortgagees should multiply the living area of the property (square feet) by $014.

        Here’s one area where HUD (via the VA) underestimated housing costs, as $0.14 per square foot is short of covering maintenance and utilities in most states.

    • I interpret the change to mean that a technical default would include missed utility payments in addition to missed property taxes or insurance. I gather there is significant concern at HUD about utility liens & association liens.

      The $.14 per square foot would remain the same. With the addition of utilities to the list of property charges, it means we will need to verify the past payment of utilities. How many utilities and for how long is the question. I expect that requirement to be nightmarish for originators & processors.

      What I don’t necessarily think is going to happen is that utilities would be required to be part of the LESA calculation. At least I hope not.

      • Mr. Neumeyer,

        One item in the Fully Funded LESA is Property Charges (see Section 5.3 of the Guide). So what you are saying is that HUD will increase the set aside yet what will HUD do about the places where property charges are part of testing to see if seniors meet certain tests as provided in my first reply to REVGUYJIM.

        All HUD is doing is amending the term “property charges.” It makes that proposal without any restrictions or limitations. One should reasonably expect that the change will be across the board.

        As to the 14 cents per square foot per month computation leading to Monthly Residual Income, that applies to both utilities and maintenance as Mr. Hanley notes above. So citing 14 cents as strictly utilities is wrong but as to how much of it applies to utilities and how much to maintenance, HUD has yet to unveil that information.

      • Not all property charges are included in a LESA, but all property charges require documentation (payment history or otherwise). That’s where this change will prove to be most burdensome. I’m not sure where you get the impression that utilities will become part of the LESA requirement.

      • Mr. Neumeyer,

        There are only four variables in the LESA computations. Two are used in both computations and the third variable is used exclusively in the Partially Funded LESA while the fourth is used exclusively in the Fully Funded LESA.

        The one variable only used in the Partially Funded LESA is the Monthly Residual Income Shortfall (abbreviated MRIS) while the one used exclusively in the Fully Funded LESA is Property Charges as specifically defined. That definition is: “PC (Property Charges) ÷12 is the current total monthly Property Charge for
        property taxes, homeowners insurance and flood insurance.” The quotation can be found at Section 5.3 of the HECM Financial Assessment and Property Charge Guide.

        The proposed change states: “Including Utilities as Property Charges. FHA proposes to amend the definition of “property charges” to include utilities as a borrower responsibility, when failure to pay such utilities would result in a lien and would potentially trigger a due and payable event.”

        So if HUD is only changing the definition of property charges, then where that would have a great bearing is in the definition of Property Charges used in computing Fully Funded LESAs. But we agree that it has further implements. Please read my reply to REVGUYJIM on June 30.

  • REVGUYJIM brings up very valid points. I ask myself if this is going to lead up to raising the $.14/s.f. charge included in the FA ruling to an increased amount for calculating purposes?

    Another item mentioned in the article, which I along with others pointed this out, is with the cap scenario. I fear what affect this will have on the secondary markets and GNMA trading ability?

    A lot of concerns with the new proposed changes being made by HUD. I still say the CFPB is an instigating factor behind a lot of this?

    John A. Smaldone
    http://www.hanover-financial.com

    • John,

      REVGUYJIM is out of line. That 14 cents applies to both utilities and maintenance as Mr. Hanley correctly points out above. It seems the comment of REVGUYJIM bears little relevance.

      The proposal is to change the definition of property charges not to raise some per square foot computation.

      • Jim,

        I appreciate your intervention and clarification. We have so many changes occurring from new rules enforced to changes to the new rulings and you name it. The whole industry is in a flux!

        However, again, my thanks to you sir.

        John

  • Ummm… “a borrower can tap up to 100% of the eligible proceeds (with an adjustable) compared with about 60% if they opt for a fixed-rate loan.” News to me. The columnist may want to check his facts.

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